Thursday, 29 December 2016

Before the Christmas
break David Blanchflower asked me a question on twitter: “why do you
think we have seen the move to right-wing rather than left-wing
populism?” This is my reply. I’ll just talk about the US and UK
because I do not know enough about other countries. (Here
is an interesting analysis of populists in Eastern Europe.) I’ll take it as read that there are currently well
understood reasons for people to want to reject established
politicians, and the Blanchflower question is really about why that
rejection went right rather than left.

In my answer I want
to distinguish between two types of people. The first are those that
are not that interested in politics, and are therefore not well
informed. They depend on just a few parts of the MSM for their information. The second
are those that are interested in politics and are well informed,
using multiple sources which are not just confined to the mainstream
media (MSM). I want to argue that this distinction is crucial in
helping us understand what happened in 2016.

I also want to use
the term populist for policies in its most simple form, as policies
that are likely to be immediately popular with the public, without
the negative connotations that I discussed here.
Populist policies on the left would focus on measures to curb
financialisation and the power of finance (‘bashing bankers’),
and measures to reduce inequality (which are popular if expressed in
terms of the 1%, or CEO pay). Right wing populist policies include of
course controls on immigration, combined with constant references to
national identity. The need to control international trade can be
invoked by left and right.

Among those who are
well informed, there is no evidence that dissatisfaction with
existing elites broke right rather than left. Indeed membership
of political parties in the UK suggests the opposite is true. Party
members in the UK are almost by definition likely to be much more
interested in politics than the average citizen, and will not be
dependent on one or two elements of the MSM for information. As the
Labour party leadership has shifted left and adopted some of the left
wing populism I’ve described, its membership has exploded. The
figures are remarkable. The Labour party currently has a membership of over
half a million. This is probably [1] at least three times the
membership of the Conservative party. UKIP, the populist party of the
right, has a membership of only 39,000, which is below the membership
of the Greens.

The Sanders campaign
indicates both the popularity of left wing populism among political
activists in the US, but also that left wing populist policies can be
as popular with voters as those from the right when they get a national platform.
Sanders put greater taxes on the rich and additional Wall Street
regulation at the centre
of his platform, as well as opposition to trade agreements. The
campaign was largely funded by individual donations, in contrast to
the other campaigns. With the exposure that an extended election
process gave him, Sanders’ brand of left wing rhetoric got national
coverage and proved pretty popular. Sanders claimed, with some
justification,
that he actually polled better against Trump than Clinton, and it
remains an open question whether a populist from the left might have
done better against Trump than Clinton, who epitomised the
establishment.

During the Sanders
campaign left wing populist ideas did get wide coverage in the MSM,
but this is the exception rather than the rule. After the financial
crisis there was a brief period of about a year when these more left
wing themes were a major media focus, but since then they appear only
occasionally in the MSM. In contrast parts of the MSM in both
countries has for many years produced propaganda that supports right
wing populism, and the non-partisan elements of the MSM have done
very little to contest this propaganda, and on many occasions simply
follow it.

Let me put these
points in a slightly different way. For the few
of us that do attach great importance to the media in understanding
recent events, it would be a major problem if on occasions where
alternative ideas were given considerable coverage in the media they
were ignored by voters. It would also be a major problem if those who
were much less dependent on one or two MSM sources for information
behaved in the same way as the average voter. But fortunately for us
both the Sanders campaign and UK party membership suggest neither
problem arises, but instead these pieces of evidence provide support
for our ideas.

So in both the US and UK, among those who
are exposed to left wing populism or who access a much broader range
of information than that provided by the MSM, there is no puzzle of
asymmetry. Left wing populism continues to appeal. The asymmetry at
the level of the popular vote, that gave us Brexit and Trump, can be
explained by asymmetry in the media. Right wing populist ideas not
only get much more coverage than left wing populist ideas, but
sections of the MSM actively promote these ideas. Given that this
focus on the importance of the providers of information is intuitive,
it is really up to those who think otherwise to provide both theory
and evidence to support their view that the MSM is unimportant.

[1] I say probably
because the latest data we have for Conservative party membership is
2013. However I think it is reasonable to speculate that lack of
publication means numbers have been going down, not up.

Wednesday, 21 December 2016

What do we mean when
we say the economy is recovering from a recession? Do we mean it has
started growing again, or do we mean it is returning to its
pre-recession trend? Brief research suggests there is no standard
definition, but Wikipedia is clear it is the latter:

“An economic
recovery is the phase of the business
cycle following a recession,
during which an economy regains and exceeds peak employment and
output levels achieved prior to downturn. A recovery period is
typically characterized by abnormally high levels of growth in real
gross
domestic product, employment, corporate profits, and other
indicators.”

The second sentence
is crucial here. All economies grow on average: they have a positive
trend growth rate. An economic downturn (or worse still a recession)
involves the economy dipping below trend (or in a recession not
growing at all). Typically whenever that has happened in the past,
most economies make up for the growth they lost in the downturn,
by growing more rapidly than trend once the downturn is over. This
had certainly been true for the UK. We expect economies to grow over
time because of technical progress, so it seems almost obvious that a
recovery must involve above average growth until we return to
something like an underlying trend.

Imagine a 5,000
metres race. Suppose an athlete trips and stumbles, leaving the main
pack behind. If 5 minutes later I said the athlete was recovering,
would you think this meant that they were getting back to their
previous pace but still well behind the main group, or that they were
getting back in touch with the main pack? I suspect you would think
it meant the latter, and you would call a complete recovery when they
were back within the main group. If you think about the main group as
the underlying trend path of the economy, then a recovery in growth
means getting back towards this trend path.

For this reason I
would define a recovery from recession as above trend growth, and I
think most macroeconomists would do the same. Here is recent
quarterly growth in UK GDP per head.

The red line is the
pre-crisis trend growth rate. You can see from this that only 2014
could possibly be called a recovery, and even that is a bit of a
stretch. The UK is far from unique in this respect, but unlike other
countries the UK economy has a pretty clear and unchanged trend
growth rate since the 1950s. Until now that is. This global lack of
recovery begs many important questions, which those who read
economics blogs will be very familiar with: has the financial crisis
had a permanent negative effect on productive potential, was the
pre-crisis period really a disguised boom, are we suffering from
secular stagnation, what role did austerity play?

Yet all of these
important issues are sidelined in popular discussion if we misuse the
term recovery, and instead describe any positive growth after a
recession as a recovery. This is not a problem for economists, who
tend to talk numbers, but it does matter for the public debate. I
cannot help feeling that calling any positive growth after a
recession a recovery also adds to a sense of disconnect people have,
particularly when (as in the UK) there has really been a recovery in
employment, such that productivity has been virtually flat. People
ask how come there has been a recovery and yet my wages are still so
much lower
in real terms than they used to be?.

When the underlying
trend may have slowed or shifted, then it becomes difficult to know
what is or is not a recovery, but that is no reason to misuse the
term. When we are talking about the past, then things should be
clear. Here is the same data for 1981.

It is obvious from
this data that the recovery from the 1980 recession only really began
in 1983. The two previous years saw as many periods of below trend
growth as above trend growth: given normal growth, the economy was
effectively standing still. Unless, of course, you have a political
point to prove. In 1981 the Conservative government of Margaret
Thatcher raised taxes substantially in the Spring Budget, despite
just seeing 5 quarters of falling output per head. They increased
taxes after falling output because they wanted to reduce the budget
deficit. 364 academic economists quickly wrote a letter denouncing
the policy - a Brexit like majority at the time.

“The economic recovery that the 364 said would not happen began
more or less as soon as the letter appeared.”

This sentence has
been repeated time after time by right wing economists and
politicians: so often that it is now repeated as fact by BBC
journalists. It has become what I call a politicised truth: something
that is false but is perceived to be true by journalists who talk to
politicians but not academics. And the statement that the recovery
began as soon as the letter appeared is simply false if you use the
term recovery properly: the recovery began a year and a half later.
Had fiscal policy not been tightened in the 1981 budget, the recovery
might have begun earlier than the end of 1982. In that sense, the
economists were vindicated by subsequent events.

In 2010, George
Osborne was warned by many academic economists - almost certainly
a majority at the time - that embarking on austerity so soon after
the recession was folly. But, just as in 1981, he wanted to reduce
the deficit. It is not difficult to imagine that as he pondered these
warnings from academics, he thought to himself that Margaret Thatcher
got the same advice in 1981 and everything he had read said the advice was wrong because the
recovery started immediately after taxes were increased. He would
have been emboldened to do the same, with what we now know were
disastrous consequences. Just two years later, GDP per head had lost
another 3% or more relative to trend.

This is partly a
story about the dangers of propaganda that you begin to believe
yourself. But it is also about the potential ambiguity of one single
word: recovery.

Monday, 19 December 2016

A past member of the
UK’s monetary policy committee once told me that they got much more
intelligent questions from committees of the House of Lords compared
to committees of the House of Commons. This should not be too
surprising, as there are some people with considerable knowledge and
experience in the Lords.

Below is an excerpt
from the conclusions
of a recent Lords EU Committee Report (HT Frances Coppola)

“The notion that a
country can have complete regulatory sovereignty while engaging in
comprehensive free trade with partners is based on a misunderstanding
of the nature of free trade. Modern FTAs involve extensive regulatory
harmonisation in order to eliminate non-tariff barriers, and
surveillance and dispute resolution arrangements to monitor and
enforce implementation. The liberalisation of trade thus requires
states to agree to limit the exercise of their sovereignty. The four
frameworks considered in this report all require different trade-offs
between market access and the exercise of sovereignty. As a general
rule, the deeper the trade relationship, the greater the loss of
sovereignty.”

There you have, in
one calm and measured paragraph, the contradiction at the heart of
the argument put forward
by Liam Fox and others that leaving the EU will allow the UK to
become a ‘champion of free trade’. You cannot be a champion of
free trade, and have sovereignty in the form of taking back control.

It is not a
contradiction, of course, if you are happy to accept the regulatory
standards of the US, China or India. That appears to be the position
of Leave leaders like MP Jacob Rees Mogg. Ellie Mae O’Hagan spells
out what this may mean in practice. Lead in toys - bring them in so
we can sign a trade agreement with China. And you can be sure that
this will be the nature of the discussion every time a trade deal is
signed. In each case we will be told that we have to accept this drop
in regulatory standards, because British export jobs are on the line.

This is the point of
Dani Rodrik’s famous impossible trilemma:
you cannot have all three of the nation state, democratic politics
and deep economic integration (aka free trade). His trilemma
replaces sovereignty, by which in meant in this context the nation
state being able to do what it likes, by democracy. In the past I
have always found this problematic. Surely a democracy can decide to
give away a bit of its sovereignty in return for the benefits of
international cooperation (in the form of trade deals, or indeed any
other kind of international cooperation). After all, every adult in a
relationship knows that this relationship means certain restrictions
on doing just what they would like.

At first sight, it
would seem as if the Brexit vote shows Rodrik is right. Democracy
voted to take back control, which means reducing trade integration.
But I think it is becoming increasingly clear that this is the wrong
interpretation. Voters were told they could take back control and be
no worse off, and polls make it clear that message was believed by
many Leave voters. As it becomes clear that people will be worse off,
as depreciation induced inflation cuts real wages, opinion is
changing. Polls already suggest
that if the vote was held again, we would get a different result.
Polls
also suggest more voters want to prioritise favourable trade deals in
negotiations, not curb immigration. Over the next year or two this
will only intensify, as prices rise, as companies make plans to leave
the UK, as the problems caused
by declining immigration emerge, and as the UK’s weak
negotiating position becomes clearer.

Leavers know this,
hence the attempts to remove
any kind of democratic oversight from the Brexit process. At present
MPs appear transfixed by the light of the Brexit vote, even though
most know
Brexit is an act of self harm. But it was utterly predictable from
the day that Corbyn was re-elected that we would see a revival of the
Liberal Democrats. As they chalk
up election victories, it might just be possible that we could yet
see some democratic oversight of the Brexit process. [1]

To see a model of
what could and should happen, look to Switzerland, where referendums
are part of political life. In February 2014 Switzerland voted to
restrict immigration from the EU, even though this jeopardised their
trade relations with the EU. Since then the EU has insisted that its
bilateral trade deals with Switzerland depend on free movement. As a
result the Swiss parliament has backed down, and just passed
measures which greatly diverge from the referendum proposal, even
though in Switzerland referendums are (unlike the UK) meant to be
constitutionally binding.

So we see in
Switzerland, and perhaps we will see in the UK, that parliamentary
democracy can be compatible with trade integration. Rodrik is right
that deep trade integration (the pressures from which will continue,
as Richard Baldwin outlines)
puts pressure on the ability of nation states to decide on their own
laws, but a democratically negotiated compromise is possible. (After
all, national languages are
a barrier to trade.) Perhaps the examples of the UK and Switzerland
suggest two things: first that these negotiated compromises should be
out in the open rather than done behind closed doors, and secondly
that what is very difficult to mix are trade integration with
national referendums.

[1] The conventional
logic is that MPs would go along with Brexit because the Remain vote
is concentrated in too few constituencies. But outside Scotland the
Leave vote is now split three ways (Conservative, Labour and UKIP).
Labour may mock
the LibDems as Brexit deniers, but as the LibDems get the votes not
only of people who deeply care about being part of Europe (see the surge in Remain identity noted here) but also of
those that voted Leave but are now getting concerned, they will be
the ones with the last laugh.